EUR/USD: Powell May Propel Euro Higher, Technical Picture Looks Bullish

Make the trend your friend – EUR/USD is steadily moving up, setting higher highs and higher lows despite elevated US bond yields. It seems that investors have already priced the increase in long-term returns, cheering every dip in the ten-year Treasury bond yield and weathering fresh rises.

What does the central bank think of it? Jerome Powell, Chairman of the Federal Reserve, testifies before Congress and markets are eagerly awaiting his comments on the Fed’s bond-buying scheme. Does the bank continue seeing the current increase in yields as a healthy sign of vaccine-led growth down the road?

Dismissing these recent moves would hurt stocks, which need low interest rates to thrive. On the other hand, if Powell says the Fed is ready to push yields lower, concerns of overheating and inflation may cause the bank a new headache.

The world’s most powerful central banker will likely try to walk a fine line – but if one needs to bet, it would be on the side of pumping more funds than tightening. It is essential to remember that some ten million Americans are out of work. Powell will also reiterate that the Fed is “not thinking of thinking of raising rates” as he once said, pushing expectations for hiking borrowing costs back to the more distant future.

Erring on the side of caution will likely push the greenback lower, allowing EUR/USD to hit new highs. However, even Powell’s power has its limits. Christine Lagarde, President of the European Central Bank, said on Monday that she is watching rising bond yields closely.

Returns on the sovereign debt of various European countries dropped in response, but are back up on Tuesday. Can the Fed Chair make a more convincing case? The answer is yes, but any downside move in the dollar may be gradual.

Yields and Powell’s testimony remain in the spotlight, with other topics such as vaccinations and economic data staying on the backburner, at least for now.

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